If you’ve never had a credit card or a loan, you don’t have a credit history. Potential lenders see a person with no credit history as risky, sometimes just as risky as someone with poor credit. The question is how you go about building credit when you’ve never had credit. You may have heard that you can get started with a secured credit card. Can secured credit cards help you build credit?
What is a Secured Credit Card?
A secured credit card is a credit card that’s secured by a deposit account. The bank or finance company you’re borrowing from holds your deposit as security to reduce the risk of loaning you money because if you don’t make your payments, they can keep your deposit. The amount of your credit line is usually equal to the amount of your deposit. If you make your payments as agreed, the lender may return your deposit to you after a certain number of months and convert the card to an unsecured card.
This type of card may be a good option for someone trying to build credit from scratch. It may also help you if you’ve had credit problems in the past and are trying to rebuild your credit. It’s usually not hard to be approved for this type of card.
How Long Does it Take for a Secured Card to Improve Credit?
The company that extends credit on a secured card typically reports to one or more of the major credit bureaus. A secured card appears on your credit report like any other card. As long as you make your payments on time and avoid using more than 30 percent of your available credit, you’ll begin to build a good credit history.
If you’re building a credit history from scratch, you may be able to qualify for an unsecured card after 6 to 12 months. If you’re trying to rebuild after a bankruptcy or other negative item, it may take a little longer since the negative items may still be on your credit report.
Understanding the Terms of a Secured Card
If you decide to apply for a secured card, make sure you understand what you’re agreeing to. There may be an annual fee or other fees that are charged against your credit line, lowering the amount that’s available to use. The interest rate may be high, compensating the lender for taking a chance to loan money to you.
Taking Care of Your Credit
Whether this is your very first credit card, or you’re trying to rebuild after credit issues, start being proactive about taking care of your credit. Always pay your payments on time and avoid using a large percent of your credit line. Also, make sure to pay attention to your credit report to ensure that the information being reported is accurate.
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